Do Chapter Sub S Corps File Personal Tax Returns?
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For tax purposes, an S corporation is somewhat of a hybrid entity that exhibits the characteristics of both a corporation and a partnership. Although it operates like a corporation, the business is not subject to double taxation since it is the shareholders, not the corporation, who pay the federal tax on the profits of the business. Nevertheless, the S corporation must still file an annual corporate income tax return.
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Become an S corporation
In order to operate your business as an S corporation, you must first meet a number of IRS requirements. Your business must operate as a domestic corporation, have only one class of stock, and have no more than 100 US shareholders.
If you meet these three conditions, you must file Form 2553 to elect the treatment of S corporations by the IRS. When you do, the business is then subject to a different form of taxation than typical corporations.
Taxation of S corporations
Most corporations are subject to C corporation tax rules, which include double taxation. This means that the company is responsible for paying income tax on its profits, and then the shareholders are responsible for paying a second tax when they receive dividends from the company.
However, an S corporation pays no tax to the IRS. It is treated similarly to a partnership in that income and deductions flow through to each shareholder and must be reported on their personal tax returns in proportion to their respective ownership shares.
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Annual corporate tax returns
Even though the S corporation does not pay income tax, it is responsible for filing an annual income tax return on Form 1120S. This tax form is provided for informational purposes only and provides the IRS with an overview of business income and expenses.
In addition to Form 1120S, the S corporation is also responsible for preparing a separate K-1 for each shareholder to report their respective share of profits and deductions on their own tax return.
To illustrate, suppose your S corporation has 10 equal shareholders and earns $1 million in revenue and reports $500,000 in deductible expenses. In most cases, the S corporation must attach 10 K-1s to Form 1120S, each of which must report $100,000 of income and $50,000 of expenses to each shareholder. All of these forms must be submitted to the IRS no later than the 15th day of the third month following the end of the tax year, which is generally March 15.
Shareholder tax returns
Each shareholder of an S corporation will receive a copy of their K-1 that the corporation prepares. As a shareholder, you must incorporate the amounts reported on your K-1 into your own tax return. Therefore, when you receive the K-1 with $100,000 of income and $50,000 of deductions, your personal tax return will include an additional $50,000 of taxable income from the business you are responsible for paying the tax on. tax. Since you are including these amounts on your own tax return, you must meet the appropriate deadlines for your Form 1040, which is April 18, 2022, for 2021 tax returns.
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